The Relevance of Stock Options for Lower-Level Employees: WP Engine's Perspective vs. General Industry Practices

While many companies believe that stock options are primarily reserved for higher-level employees, there are compelling arguments that suggest offering stock options to lower-level employees can be both beneficial and fair. WP Engine, a web hosting and managed WordPress service provider, has a different stance, as evidenced by their approach of offering stock options even to their hourly-paid support team members. This article explores the challenges and considerations surrounding the offer of stock options to lower-level employees, along with insights from WP Engine’s experience.

Challenges and Considerations for Offering Stock Options to Lower-Level Employees

Despite the potential benefits of stock options, numerous challenges can deter companies from offering them to lower-level employees. These challenges include cost and complexity, employee understanding, retention and motivation, equity dilution, and market volatility. Let’s delve deeper into each aspect.

Cost and Complexity

Administering stock options can be complex and costly, particularly for smaller companies. The administrative burden of tracking, granting, and exercising stock options can be significant. Additionally, there are legal compliance costs associated with issuing stock options, which can be a barrier, especially for companies with limited resources.

Understanding and Value

Lower-level employees often lack a clear understanding of how stock options work and their value. This can lead to confusion and a lack of appreciation for the potential long-term benefits. Companies may prefer to offer more straightforward compensation packages that are easier for employees to understand and value.

Retention and Motivation

Stock options have traditionally been used as a retention tool for higher-level employees who have significant influence on the company’s performance. However, for lower-level employees, stock options may not serve as a strong motivator due to their limited understanding and the downstream impact on share ownership.

Equity Dilution

Companies with a legacy of issuing stock options to numerous employees may face equity dilution, particularly from the perspective of founders and early investors. While this is less of an issue when issuing options to a smaller group, it becomes more significant as more employees are included.

Market Volatility

Stock options are more appealing in stable or growing markets. In uncertain market conditions, lower-level employees may be less attracted to options due to the perceived risk of losing their value. They may opt for more stable and predictable forms of compensation, such as cash bonuses.

WP Engine’s Experience

WP Engine, an organization that values equity compensation, has taken a different approach. They offer stock options to all employees, even those in lower-level roles. This perspective highlights several key points that are worth considering:

Knowledge and Education

Many employees, especially those at lower levels, lack understanding about stock options and their tax implications. WP Engine has taken steps to educate all employees about these matters. However, this education alone does not address the challenges of exercising options, especially for employees who might be living paycheck to paycheck.

Handling and Cost

Even when an employee has been granted stock options, they need to find the post-tax income to exercise them, which can be a significant portion of their take-home pay. In addition, employees need to consult with their CPA, a luxury that is not always available to lower-level employees. The costs associated with these services, as well as handling tax returns, can outweigh the value of the options.

Multiples and Financial Situations

The concept of stock options as an equity class may not be appropriate for lower-level employees, especially those with limited savings or carrying significant debt. The value of stock options increases over the life of the options, but the distribution of these gains can be uneven, leading to financial disparities among employees at different levels.

Alternative Compensation Methods

Instead of or in addition to stock options, companies should consider offering alternative forms of compensation that align more closely with the roles and situations of their employees. Cash bonuses, profit-sharing, and other forms of non-equity compensation can sometimes be more meaningful and directly tied to performance. These methods can be more straightforward and provide immediate financial benefits, making them ideal for employees who require a more immediate form of financial stability.

Conclusion

While stock options may not be ideal for all employees across all industries, they can still be valuable when offered in the right context. Companies should carefully weigh the benefits and challenges of offering stock options to lower-level employees and consider alternative methods of compensation that better suit their needs. WP Engine's approach serves as a compelling case study that demonstrates that stock options can be effectively implemented regardless of the level of the employee, provided that clear communication, education, and support are in place.